Payday lenders to see their sky-high interest rates capped after Lords back change in law

Interest rates on payday loans will be capped after the government accepted a House of Lords push to amend new laws currently being passed by Parliament.

Astronomical rates that have risen as high as 16,000 APR in the worst cases will be banned following the move, striking a blow to the short-term lending industry that has boomed during the financial crisis as cash-strapped households have been starved of cheaper forms of lending from banks.

The Government accepted a change to the Financial Services Bill after Lords backed an amendment to include powers for the incoming Financial Conduct Authority to to cap interest rates if it felt firms were fleecing customers.

Under pressure: Peers in the House of Lords are set to vote on an amendment to the Financial Services Bill which could see the interest and charged impose on customers capped

The proposed amendment from Labour peer Parry Mitchell argued that the bill should include new rules to ‘determine a maximum total cost for consumers of a product.’

It was backed by the incoming Archbishop of Canterbury, Justin Welby, and other bishops and cross-bench peers. The Right Reverend Welby, who also serves on the Government’s Banking Commission, said some rates were ‘clearly usurious’.

He added: ‘It used to be said that you couldn’t take away people’s beds and cloaks because they were essential for life. That is the Hebrew scriptures. Today, there are equivalent things being taken away as a result of these very high rates of interest.’

Payday lenders have argued they provide a valuable service when used properly, and that voluntary codes of conduct could police rogue lenders that fail to treat people fairly. They have been keen to work with lawmakers to avoid further regulations - the largest payday lender, Wonga, recently hired former Number 10 adviser Jonathan Luff in a public affairs role.

The House of Commons had initially rejected any cap on rates before sending the Financial Services Bill to the Lords, but support in the second chamber to amend the Bill meant the Government could have been defeated.

The Government yesterday accepted the measures without the need for an amendment to avoid a defeat.

Lord Mitchell said the plan would help ‘those who live in the hell-hole of grinding debt’. He said: ‘The losers are clearly the loan sharks and the payday lending companies. They have tried every trick in the book to keep this legislation from being approved and they have failed.’

Apetition started in support of the changecollected nearly 50,000 signatures and was used to persaude members of the Upper House. Arthur Breens set up the petition on the Change.org website after his foster daughter Karen, a pseudonym, left school at 16 and slipped into a ‘cycle of debt’.

Listen up: Labour MP for Walthamstow Stella Creasy has been campaigning for stricter rules for payday lenders since 2010

On the petition he said: 'Karen used up to eight companies in an unrelenting chain of borrowing. £100 quickly became £1,000 and Karen could no longer track who she owed money to.

‘When the threatening letters and phone calls started she was forced to leave home and started sleeping at friends' houses - moving from sofa to sofa. This means she’s sometimes late for work and the job she’s worked so hard for is at risk. All for a loan of £100.’

A cap on payday lending rates had been championed by Labour MP for Walthamstow Stella Creasy who has been campaigning on the issue since 2010.

She said: 'Today the Government seems to be finally waking up to warnings about the high cost credit industry we have been raising for over two years.

Only last week that they continued to argue self regulation was the way forward and refused to act – citing codes of practice and a review of self-regulation planned for 2013. Today’s developments show they now accept they have been on the side of the legal loan sharks for too long and it’s time to speak up for British consumers.'

However, Creasy warned that the Government would need to stick to its commitment to bring this change forward if the new rules are to include caps on the cost of credit.

She said: 'We will wait to see what they propose and will only support measures which benefit consumers directly through impacting the price of credit. Talk of ‘sanctions’ after the damage has been done which require legal action and further codes of practice will not tackle the problems many face now with these companies.'

Earlier this week parenting website Mumsnet.com announced that it would not be running adverts on its site from payday lenders due to the ‘misery’ they cause for some families.

Justine Roberts, Mumsnet CEO and Co-Founder said: ‘There are clear problems with this industry, and until it is cleaned up, we don’t want anything to do with it.’

The Office of Fair Trading is currently investigating 20 payday lenders who it believes are breaking rules.

The regulator said it had concerns over poor practices in the market after it found some lenders were pursuing several payday lenders over how they chase debts from borrowers.

Loan payment calculator

Credit Card Reality Check Calculator

Your plastic debt

This calculator will show you just how long it's going to take you to clear your credit card balance if you don't wake up, face reality, stop paying the bare minimum and start clearing this punitive form of debt.

Your credit card balance:£

Interest rate:%

Monthly payment:£

Result

Number of monthly payments:

Clear your debt quickly

Now see how much you need to pay a month to clear your balance in the shortest possible time.